For many transactions, a buyer and a seller of a given item must become aware of one another in order to become counterparties to the transaction or “trade.” In a computer-implemented electronic trading system, at least one party with a desire to buy an item and one party with a desire to sell the same item must become known to the system so it can execute the trade.
In general, there are two ways in which an electronic system can become aware of counterparties to a transaction. In the first case, buyers and sellers inform the system of their trading desires without any information about potential counterparties provided to them by the system, in the hope that a counterparty is using the same system. In the second case, at least one party informs the system of their trading desires in response to information regarding potential counterparties provided to them by the system. In the second case, the system facilitates the trade by communicating information regarding potential counterparties to users of the system. For the purposes of this background discussion, a party's trading desires include, but are not limited to, information such as what item is being bought or sold, how much of the item a party wants to buy or sell, and what price a party is willing to pay or accept.
In many trading systems or markets, there is an unavoidable problem created when any participant has a relatively significant desire to buy or sell. On the one hand, if other trading system or market participants become aware that there is a significant buyer or seller, this demand for (or supply of) a given item will tend to cause the price of the item to “move away” from the participant who revealed their trading desire to the trading system or market. The details of how this negative market impact occurs will be known to those schooled in the art, but the end result is that buyers end up buying at a higher price and sellers end up selling at a lower price than they would have if knowledge of their desires had not become known in the trading system or market.
On the other hand, if, in an effort to avoid the above dynamic, all trading system or market participants refuse to communicate their trading desires, then no buyer can find a seller, no seller can find a buyer, and no trading occurs.
In such situations, trading system or market participants are damaged if they do provide information about their trading desires to the market (because it will be used against them), but are also damaged if they do not provide such information (because they will not find a counterparty with whom they can trade).
This conflict of interest can be characterized as a question faced by every participant in a such a trading system or market: “how can I disclose enough information about my trading desires to get a trade done, without disclosing so much information that others can use it against me?” The prior art does not adequately answer this question in this context.
Known electronic trading systems and methods use one or both of two general approaches to limit the amount of information disseminated in order to communicate trading desires. In the first, the number of parties who receive the information is limited, hopefully to a subset of trading system or market participants who cannot (or are unlikely to) use the information against the party who provided it to the trading system or market. In securities markets, see, for example, U.S. Pat. No. 7,136,834.
In the second approach, information concerning the trading desires of a given party seeking to trade is only partially disclosed to other trading system or market participants, with the goal of limiting the ability of those participants to use information about the potential trade against the given party who provided the information to the trading system or market. In securities markets, see, for example, U.S. Pat. No. 7,685,052.
In securities markets, further discussion of problems faced by market participants in divulgation of their market desires appears in the article “Dark liquidity,” available on Jun. 14, 2011 at http://en.wikipedia.org/wiki/Dark_liquidity.
Known trading systems and methods typically use one of two methods to determine the price at which a buyer and seller trade. In the first, the system allows the buyer and seller to negotiate a price by making offers and counter-offers at different price points. In the second approach, the system matches a buyer and a seller at a price derived from the price in an external system, such as the price in a public market. For example, if a system matches a buyer and seller of stock ABC at time X, it would use the price of stock ABC in the public stock market at time X to effect the trade. In this context, “the price” of a stock in a public stock market at a given point in time might mean the current bid, the current offer, the midpoint between the bid and offer, or some other derivative price at that point in time.